Credit enquiries hit eight-month high, says CreditorWatch
Trade activity has improved for a second consecutive month but inflation and cash rate rises are a key threat to confidence and spending, CreditorWatch warns.
The March 2022 CreditorWatch Business Risk Index (BRI) shows business-to-business trade activity rose 55% of its January low but year-on-year was down 35%.
Credit enquiries, a leading indicator of increasing business activity, were up 45% over the last quarter. Enquiries reached 219,428 in March: the highest since July 2021. This indicated business conditions were normalising as companies resumed trading at pre-COVID levels.
Trade receivables, the amount owed to a business by its customers following the sale of goods or services on credit, also increased, indicating a turning point for trade activity.
But trade payment defaults, an indicator of rising insolvencies, were at the highest level since October 2020.
CreditorWatch BRI data, which ranked over 300 regions by relative insolvency risk based on data from around 1.1 million ASIC-registered businesses, showed the national probability of default was 5.8% in March, up from 5.7% in February, its forecasts showing further rises this year.
Court actions were at the highest point since March 2021, indicating enforcements and collection activities were returning to normal levels.
Read more: Business insolvencies set to rise, according to CreditorWatch
CreditorWatch data showed the five regions that were most at risk of default over the next 12 months were Bringelly-Green Valley (NSW), Merrylands-Guildford (NSW), Gold Coast-North (QLD), Canterbury (NSW) and Surfers Paradise (QLD).
The five regions least at risk of default over the next 12 months were Wheat Belt – South (WA), Glenelg-Southern Grampians (SA), Mid North (SA), Murray River-Swan Hill (VIC) and Esperance (WA).
Trade payment default rates in the flood-impacted region of Lismore grew from February to March but remained below the national average, CreditWatch said.
Probability of defaults within the hospitality industry soared to 7.2% in March, up from 6.7% in February. CreditWatch said this was due to a “perfect storm” of self-imposed lockdowns affecting consumer spending, ongoing staff shortages and rising input costs due to supply chain shortages and fuel price rises.
As hospitality spending was viewed as discretionary, CreditWatch said this industry was likely to feel the pinch as consumers tightened their belts amid rising prices and interest rate rises.
According to CreditorWatch BRI data, the three industries most at risk of default over the next 12 months are:
- Food and beverage services: 7.2%
- Arts and recreation services: 4.9%
- Transport, postal and warehousing: 4.8%
CreditWatch noted these industries were exposed to cuts in discretionary spending and rising fuel prices.
The three industries least at risk of default over the next 12 months are:
- Healthcare and social assistance: 3.3%
- Agriculture, forestry and fishing: 3.6%
- Manufacturing: 3.7%
Referring to the increase in trade receivables and credit enquiries as “encouraging”, CreditorWatch CEO Patrick Coghlan (pictured) said rises in trade payment defaults and court actions was a concern.
“It’s great to see some signs of recovery, and like the rest of the business community, I truly hope this can be sustained,” Coghlan said.
“However, I remain cautious about the timeframe for trade activity to return to pre-COVID levels. There is still so much uncertainty out there, and with inflation on the rise and interest rate increases looming, consumers may be reluctant to open their wallets too much.”
The credit agency warned the economic outlook in Australia would be “bumpy”, citing COVID-related supply chain disruptions, rising inflation, expected interest rate rises, labour shortages, higher fuel prices and the impact of the east coast floods.
Read more: SME owners positive about next 12 months – BizCover report
CreditorWatch chief economist Anneke Thompson said inflation was a “key threat” to Australia’s economic outlook, noting it was “supply-side issues” rather than high demand causing prices to rise.
“This is important as future cash rate rises, while looking increasingly necessary to keep inflation within the target band, are more effective at targeting the demand side, by cooling consumers and investors’ appetite for borrowing,” Thompson said. “Indeed, the RBA will be very wary of cash rate rises further fuelling supply side price rises, if businesses on thin margins choose to pass on higher borrowing costs to consumers.”
Commenting on the 0.9 percent fall in Westpac’s April consumer confidence rating, Thompson said the prospect of continued inflation was starting to weigh on consumer’s minds.
“We are likely to see this offset the positive impact of the post-Omicron bounce back in consumer spending on things like restaurants, cafes and the arts and entertainment sector. Any sector where a consumer can easily substitute or do without the purchase, will start to feel the effects – particularly coupled with future interest rate rises,” Thompson said.
CAFBA CEO David Gill (pictured below), said hospitality was clearly one of the hardest-hit industries, particularly businesses within central locations.
“These businesses will continue to find trading spasmodic as employees continue to work from home and slowly transition back to the office, with the situation worsened by the shortage of staff, particularly those traditionally used on temporary visas,” Gill said.
Supply chain issues continued to affect a wide range of industries, which impacted businesses’ ability to source parts and equipment, he said. One missing component of a manufactured item could easily affect the entire production process.
“Transport has had a temporary reprieve with the easing of the fuel excise, but there is uncertainty as to the fuel price when this period finishes. Inflation is the other major factor that will affect business,” Gill said.
At the start of the COVID-19 pandemic, businesses turned to their commercial broker to arrange loan deferrals, and as the situation improved, to assist with loan schemes such as SMEG. The commercial broker had become “integral” to assisting business with their financing needs through good times and bad, he said.
“A proactive broker provides financial analysis that identifies cash flow requirements before they occur. Additional planning ensures that facilities are in place to ensure capital expenditure requirements are provided when needed, and sources the most appropriate products to meet these needs. This planning assists businesses through the highs and lows,” Gill said.
